Question

1. A) Draw demand and supply curves for apartments in a large city. Show the equilibrium price and quantity combination (where the curves intersect). B) Graphically illustrate and explain the impact of a rent control law that keeps rental prices artificially low. Be sure to identify the groups that are helped by the law and those that are hurt. Explain how the law impacts these groups. C) Explain the unintended consequences of the law. D) Using the demand and supply curve model, make a recommendation about whether the law should be kept, changed, or repealed.

Answer 1

A) The above image shows the initial equilibrium where supply and demand curves intersect.

B) Let's assume that the government sets a binding price ceilng at . Now, the quantity demanded at is and quantity supplied is . At , the people who were earlier demanding houses at prices lower than can no longer purchase them as people who were demanding houses at the old equilibrium price will now be buying houses at this new price.

C) This creates an excess demand for houses. The excess demand is the difference between the quantity demanded and quantity supplied

D) The price ceiling does no good to the society. It reduces prices for people who were willing to pay a higher price for these houses and the [eople who were willing to purchase at this lower price. Hence, the government should repeal this law and let the market forces decide the demand and supply at equilibrium.